China stock plunge prompts witch-hunt for market manipulators

Beijing: With more than $7 trillion wiped off China's crumbling sharemarkets since June, the recriminations have begun; though the central government, it seems, is pointing the finger at everyone but themselves.

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Five of the country's largest brokerages have been placed under investigation by the securities regulator and police in a fresh wave of crackdowns on financial market violations that has also swept up a financial journalist at respected business magazine, Caijing.

Founder Securities, Haitong Securities, GF Securities and Huatai Securities issued statements confirming they were being probed by the China Securities Regulatory Commission for "failure to review and verify the identity of clients", in accordance with market regulations.

An investor at a brokerage house in Beijing. The media spruiking of the sharemarket earlier this year is now causing widespread anger. Photo: Reuters

Authorities have repeatedly sought to lay blame on market manipulators, including foreign hedge funds and short-sellers since the sell-off began in June. Chinese equities have lost half their value since then.

But it has not acknowledged what has been a source of public anger – that the government had been implicit in encouraging the remarkable bull run which stoked the sharemarket bubble before the crash. There have been concerns too that the government-backed agency tasked with buying shares to support the market – the China Securities Fund – had backfired and in fact allowed insider trading and front-running to flourish.

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"To start, the regulator should not have tried to get the stock index to go up," Caixin, an influential business magazine – and a rival of Caijing – said in a sharp editorial on Wednesday; direct criticism of government policy and wisdom in China's state-controlled media is rare.

"Also, the CSF seemed to have picked stocks randomly, pouring capital into valuable and worthless companies indiscriminately. Critics have questioned the wisdom of these actions, and some voiced concerns about insider trading."

Who is to blame? Investors chat in front of an electronic board showing stock information at a brokerage house in Shanghai. Photo: Reuters

In a separate investigation, eight people connected to CITIC Securities, the country's largest broker, were being probed by police for "illegal trading", official news agency Xinhua said on Tuesday.

The investigation involved a former employee of the securities regulator, who was suspected of insider trading and forging documents, Xinhua said.

The Caijing reporter, Wang Xiaolu, was taken in for questioning on Tuesday night on suspicion of "fabricating and spreading false securities and futures trading information".

"Caijing firmly believes that promoting market fairness and transparency, and the healthy development of the securities market through the objective reporting of market information, is the media's responsibility," the magazine said in a statement on Wednesday.

The magazine said it had not been given reasons for Wang's detention, but noted he had authored a cover story published on July 20 which reported that officials were mulling the removal of an emergency government sharemarket support package which was implemented after the first wave of sharp market falls in mid-June.

On the afternoon the magazine article was first published, a spokesman of the securities regulator said the report was false. But on August 14, the CSRC signalled it would let the market play a larger role, and the government-backed purchasing of shares appears to have been suspended.

The securities regulator has warned media against spreading rumours or false information, and has also turned its attentions to high-frequency traders as part of efforts to soothe investor fears over possible price manipulation.

Earlier this year, it suspended a number of brokers as part of a probe into high-risk margin lending.

The use of borrowed money to trade shares was a key driving force behind the sharemarket rally in Chinese over the past year, and is seen as one of the main dangers posed to the economy by the sharemarket collapse.

"The authorities have been too involved in the sharemarket and now they're trying to pass the responsibilities to others," said Hu Xingdou, an economics professor at the Beijing Institute of Technology. "In fact, they have to be responsible for the market crisis."